To that end, she stated that she has directed SEC staff to prepare a number of rules and recommendations to address the issues outlined above. This includes, among other things: (i) developing an anti-disruptive trading rule; (ii) clarifying the status of unregistered active proprietary traders; (iii) eliminating an exception from FINRA membership requirements for dealers that trade in off-exchange venues; (iv) improving firms' risk management of trading algorithms; (v) expanding the information about ATS operations submitted to the SEC and making the information available to the public; (vi) enhancing order routing disclosure; and (vii) eliminating potential sources of conflicts between brokers and customers.

On March 13, 2014, the U.S. Securities and Exchange Commission announced that it had reached a settlement agreement with Lions Gate Entertainment Corp. that will see Lions Gate admit wrongdoing in connection with the issuance of misleading disclosure in 2010, as well as pay a $7.5 million fine. The disclosure at issue was made in connection with Lions Gate’s defense against activist investor Carl Icahn’s 2010 hostile efforts to gain control of the company via a series of takeover bids and a proxy contest.

Background

According to the SEC’s order instituting settled administrative proceedings, Lions Gate admitted to omitting material information in its public disclosure relating to an extraordinary set of transactions that resulted in Lions Gate issuing approximately 16 million Lions Gate shares to a management-friendly director. Lions Gate admitted that the transactions were designed and carried out by management to dilute entities controlled by Carl Icahn (Icahn Group), who had previously launched a campaign to gain control of Lions Gate via a series of tender offers and was expected to launch a proxy contest. The transactions diluted the Icahn Group’s interest in outstanding Lions Gate shares from 37.9% to 33.5% and increased the management-friendly director’s interest from 19.9% to 28.9%. Additionally, at the Lions Gate shareholders meeting, shareholders elected management’s slate of directors and rejected the Icahn Group’s slate. The margin of defeat for one of the five Icahn Group nominees was approximately 16 million Lions Gate shares.

The transactions included: (i) the exchange of convertible notes with an aggregate principal amount of approximately $100 million for new convertible notes on substantially the same terms except with more favourable conversion terms; (ii) the prearranged sale of the new notes from the note holder to a management-friendly director; and (iii) the immediate conversion of all of the new notes into approximately 16 million Lions Gates shares at a discount to the then market price.

In November 2010, the British Columbia Supreme Court surprisingly ruled that the transactions were not oppressive or unfairly prejudicial to Lions Gate shareholders under applicable corporate law. Query, however, given the admission of wrongdoing, what approach Canadian securities regulators or the New York Stock Exchange might take.

Disclosure

On July 20, 2010, Lions Gate announced the transactions in a press release that stated that the transactions were “a key part of [Lions Gate’s] previously announced plan to reduce its total debt, as well as its nearer term maturities,” despite the fact that Lions Gate regularly disclosed that it intended to take on more debt. In addition, the press release did not disclose that: (i) Lions Gate management hoped and expected the transactions to effectively block the Icahn Group’s tender offer and that management viewed that as a desirable benefit of the transactions; (ii) an investment partnership managed by the management-friendly director purchased and converted the new notes; (iii) Lions Gate changed its insider trading policy to allow the management-friendly director to convert the new notes; and (iv) Lions Gate lowered the proposed conversion price of the new notes even further following discussions with the management-friendly director. Moreover, in its subsequent tender offer-related filings made to the SEC, the company represented that the transactions were not part of a prearranged plan to get Lions Gate shares to the management-friendly director.

In the opinion of the SEC, Lions Gate’s disclosure amounted to materially false and misleading disclosure.

It is worth noting, however, that Lions Gate’s shares have risen from the $6.00 – 7.00 trading range in 2010 to a $30.00 - $35.00 range today. This suggests that, notwithstanding the $7.5 million penalty to the SEC, Lions Gate shareholders have benefited over the four years following the Icahn Group’s failed efforts to gain control of the company.

Application

Given that hostile takeover bids and proxy contests are often significantly influenced by investor relations campaigns, the SEC’s four year pursuit of Lions Gate has a broader importance. Specifically, the SEC’s actions appear to demonstrate an increasing focus on reviewing and policing contested transactions from a disclosure perspective. Given past practice, it should be expected that Canadian securities regulators will follow the SEC’s lead and actively investigate aggressive disclosure made in connection with contested transactions. Additionally, the settlement may provide a new outlet for aggrieved parties dissatisfied with Canadian court decisions.

Moving forward, advisors involved on either side of a contested transaction should consider carefully reviewing their client’s public disclosure from both an effective “messaging” perspective and from a full disclosure perspective.

The proposed rules, which are part of the rulemaking required by the adoption of the JOBS Act, would allow companies to raise a maximum aggregate amount of $1 million annually through crowdfunding. Investors with an annual income and net worth of less than $100,000 would be able to annually invest up to $2,000 or 5% of their annual income or net worth (whichever was greater). Investors with either annual income or net worth of at least $100,000 would be able to annually invest 10% of the greater of their annual income and net worth, up to $100,000.

Companies conducting crowdfunded offerings would be subject to certain disclosure requirements and would have to conduct crowdfunding transactions through an SEC-registered intermediary. Further, non-U.S. companies would not be eligible to use the crowdfunding rules. The SEC is accepting comments on its proposal for 90 days from the date of publication of the draft rules in the Federal Register. For more information, see SEC Release No. 33-9470. Also see FINRA's recent request for comment on proposed rules for funding portals.

On the Canadian side, the Saskatchewan Financial and Consumer Affairs Authority (FCAA) published a proposed framework earlier this month for crowdfunding in the province. Under the proposal, businesses would be able to make two six-month offerings of $150,000 each annually, and individuals would be limited to an investment of no more than $1,500 per offering. The FCAA is accepting comments on its proposal until November 6.

Meanwhile, the Ontario Securities Commission is continuing its consideration of crowdfunding as part of its work towards potentially introducing a number of new prospectus exemptions.

Earlier this week, the U.S. Securities and Exchange Commission released a report of its investigation regarding whether Netflix and its CEO, Reed Hastings, violated certain securities regulations prohibiting the selective disclosure of corporate information when Hastings posted a comment on his personal Facebook page regarding the achievement of a corporate milestone.

In doing so, the SEC considered the disclosure of corporate information on social media generally, ultimately finding that its 2008 guidance, which discusses the distribution of information on corporate websites, also applies to corporate disclosures made through social media channels such as Facebook and Twitter. Specifically, the SEC stated that where it is reasonably foreseeable that the recipients (securities professionals and/or shareholders) of such information will trade on the basis of such information, it must be disseminated in a manner reasonably designed to provide broad non-exclusionary distribution to the public. To achieve this, issuers must take sufficient steps to alert investors, the market and the media as to the channels that will be used for the dissemination of material, nonpublic information. As an example, the 2008 guidance encourages periodic reports or press releases to include web site addresses or other information regarding steps investors or the public can take to be in a position to receive important disclosure.

As such, the SEC does not preclude the use of social media sites to distribute material, nonpublic information so long as appropriate notice regarding the use of such sites has been made to investors. To this end, the SEC report cautions that issuers are expected to “rigorously” examine factors indicating whether a particular channel is a “recognized channel of distribution” for communicating with investors. While each case will be fact specific, in most cases (as in the Netflix example) disclosure of material nonpublic information on a personal Facebook page without advance notice is unlikely to qualify as an acceptable method of distribution even if the individual in question has a large number of subscribers or contacts.

In Canada, regulators have not specifically addressed issuer disclosure through social media, however, principles governing selective disclosure are set out in National Policy 51-201 Disclosure Standards. For TSX-listed companies, the TSX has published its own Electronic Communications Disclosure Guidelines. Staff of the Canadian securities administrators have also provided guidance on the use of social media by portfolio managers, noting that firms and registered individuals contemplating the use of social media should consider, among other things, establishing appropriate policies and procedures for the review, supervision, retention and retrieval of materials posted on social media websites.

On March 1, the U.S. Securities and Exchange Commission released a request for comments as it considers potentially harmonizing the standards of conduct of broker-dealers and investment advisers. While investment advisers are currently fiduciaries to their clients, broker-dealers are not uniformly subject to fiduciary standards. The notice suggests that retail customers do not appreciate the difference in duties, and expresses concern that the applicable regulatory obligations depend on the statute under which a financial intermediary is registered rather than the services provided.

As such, the SEC is requesting data and other information to assist it in determining whether to adopt a uniform fiduciary duty. Specifically, the SEC is interested in receiving empirical and quantitative data from respondents, including surveys of retail customers, information describing the extent to which different rules apply to similar activities of broker-dealers and investment advisers, and data analyzing retail customer returns generated under the two existing regulatory regimes. Comments are being accepted for 120 days after publication of the notice in the Federal Register.

As we discussed in October, the CSA has also recently released a consultation paper considering the feasibility of imposing a fiduciary duty on advisers and dealers. Comments on the CSA's paper closed on February 22.

Under current rules, companies looking to sell securities to raise capital must either register the offering or rely on an exemption. Most registration exemptions, however, prohibit companies from engaging in general solicitation or general advertising in connection with the offering.

The proposal, part of the rulemaking required under the JOBS Act enacted earlier this year, would amend Rule 506 of Regulation D, which governs private placements, to permit companies to use general solicitation and general advertising to offer securities provided that the purchasers are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors. Meanwhile, Rule 144A, which provides an exemption for resales of certain restricted securities to qualified institutional buyers, would be amended to provide that securities sold pursuant to the rule may be offered to persons other than QIBs, provided that the securities are sold only to persons that the seller and any person acting on the seller's behalf reasonably believe are QIBs.

According to the SEC Chairman Mary Schapiro, the proposed rules "fulfill Congress's clear directive that issuers be given the ability to communicate freely to attract capital, while obligating them to take steps to ensure that this ability is not used to sell securities to those who are not qualified to participate in such offerings."

The proposed rules are the latest in the SEC's moves to implement rules consistent with the JOBS Act. As we've previously discussed, the Act's provisions respecting emerging growth companies apply to foreign private issuers and, thus, the changes would potentially affect Canadian companies looking to raise capital in the U.S. Meanwhile, the CSA and OSC continue to review exemptions concerning private placements in Canada.

The SEC had asked for the stay of proceedings after the district court refused to approve the proposed consent judgment that contained no admission of liability. The district court had rejected the settlement based in part on the rationale that a consent judgment without an admission of liability was bad policy and failed to serve the public interest.

In granting the stay, the Second Circuit found a strong likelihood that the district court's ruling would be overturned. The Second Circuit took particular issue with the district court's lack of deference towards the SEC's judgment on discretionary matters of policy.

As we discussed in a post earlier this year, the U.S. SEC recently adopted an amended "accredited investor" net worth standard that excludes the value of an individual's primary residence. The SEC has now published a small entity compliance guide that summarizes the new standard and provides examples of net worth calculations.

On January 31, the U.S. Commodity Futures Trading Commission and the Securities Exchange Commission released a joint report on how swaps and security-based swaps are regulated internationally. Specifically, the report describes the regulatory framework for OTC derivatives in the Americas, EU and Asia, analyzes the similaries and differences across jurisdictions, considers issues regarding harmonization and makes a number of regulatory recommendations.

On December 8, the U.S. SEC released a statement regarding non-public submissions of initial registration statements by foreign private issuers. Historically, the SEC has allowed foreign private issuers (FPIs) to submit initial registration statements on a non-public basis for staff review prior to a public filing since the majority of FPIs were traded on foreign exchanges where there were no requirements to publicly disclose such statements before the completion of a regulatory review.

According to the SEC, however, most FPIs now making use of the non-public review process do not have securities listed outside the U.S. Consequently, the SEC has decided to generally limit its policy respecting the non-public submission of such initial registration statements to circumstances where the registrant is: (i) a foreign government registering its debt securities; (ii) a foreign private issuer that is listed or is concurrently listing its securities on a non-U.S. securities exchange; (iii) an FPI that is being privatized by a foreign government; or (iv) an FPI that can demonstrate that the public filing of an initial registration statement would conflict with the law of an applicable foreign jurisdiction. The change in policy took effect on December 8.

The U.S. Securities and Exchange Commission has adopted an amended "accredited investor" net worth standard that, in accordance with the Dodd-Frank Act, excludes the value of an individual's primary residence. The definition of accredited investor, used to determine the availability of certain exemptions from the Securities Act of 1933 for private and other limited offerings, currently includes individuals exceeding $1 million in net worth. The recently-adopted changes would maintain the $1 million threshold, but no longer allow for a primary residence to be included in calculating net worth. As we described in a blog post last year, the SEC first proposed the change in January 2011. The amended standard will become effective on February 27, 2012.

The accredited investor exemption has also garnered attention north of the border. Specifically, the OSC expressed concern last year that issuers and dealers were improperly relying on the accredited investor exemption to ineligible investors. As we discussed in a November 2011 post, Canadian regulators have now also launched a review of the domestic accredited investor and minimum investment amount exemptions. Under Canadian rules, the accredited investor standard for individual investors includes both a $1,000,000 financial asset test and a $5,000,000 net asset test, with only the latter including an investor’s personal residence (minus liabilities). Depending on the feedback (the consultation period ends on February 29th), possible options include keeping the status quo, retaining the exemptions with adjusted thresholds, limiting the use to certain investors (such as institutional investors), using alternative qualification criteria or imposing other investment limitations.

Earlier this year, the SEC adopted final rules establishing reporting requirements for market participants whose transactions in national market system securities equal or exceed two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month. As we discussed last year, the SEC initially proposed such requirements in April 2010 to identify large market participants and collect information regarding their trades in order to be able to monitor the impact of large trader activity on the securities market.

The reporting requirements, effective as of October 3, 2011, are intended to provide the SEC with data to support its investigative and enforcement activities.

According to the report, 334 whistleblower tips were received between August 12, 2011, when the final rules became effective, and September 30. The most common complaint categories were market manipulation, corporate disclosures and financial statements, and offering frauds. The SEC has yet to pay any whistleblower awards.

In the wake of a number of high-profile cybersecurity incidents, the SEC’s Division of Corporation Finance recently released disclosure guidance on the topic of cybersecurity. While the guidance creates no new legal obligations, it is intended to provide clarity regarding the forms of disclosure that registrants may have to make. In the release, the Division of Corporation Finance recognized that while no current disclosure requirements explicitly refer to cybersecurity, there are a number of existing disclosure obligations that may require registrants to disclose cybersecurity risks or incidents.

Such cyber incidents may be deliberate or unintentional, and include gaining unauthorized access to digital systems for the purpose of misappropriating assets or sensitive information, causing operational disruption or corrupting data. Meanwhile, the concept of a cyber attack also includes actions that don’t require unauthorized access to a computer system, such as denial-of-service attacks on websites. Cyber attacks may be carried out by insiders or third parties, and may use sophisticated technology to circumvent network security, or more traditional techniques like guessing or stealing a password to gain access to a computer network.

Ultimately, the guidance considers six areas in which disclosure of cybersecurity risks or incidents may be required under current regulations:

Risk Factors: The guidance provides that registrants “should disclose the risk of cyber incidents if these issues are among the most significant factors that make an investment in the company speculative or risky.” In making this determination, registrants should look at the severity and frequency of past cyber incidents, and should consider the probability and potential costs and other consequences of future incidents. Registrants should also consider the adequacy of any protective measures which are in place.
The guidance also states that in order to place the discussion of cybersecurity risks in context, registrants may need to disclose known cyber attacks or threats, instead of simply stating that these events may occur. The guidance notes, however, that there is no requirement to disclose information that would compromise a registrant’s cybersecurity.

Management’s Discussion and Analysis (MD&A): Where the consequences of a known cyber incident (or the risk of a potential incident) represent a material event, trend or uncertainty that is likely to have a material effect on the registrant’s financial condition or other elements of the registrant’s reported financial results, this should be discussed in the registrant’s MD&A.

Description of Business: The guidance provides that registrants should disclose any cyber incidents which materially affect the registrant’s “products, services, relationships with customers or suppliers, or competitive conditions” in the registrant’s Description of Business.

Legal Proceedings: If a registrant is party to a material pending legal proceeding that involves a cyber incident, this may need to be disclosed in the registrant’s Legal Proceedings disclosure.

Financial Statement Disclosures: The guidance outlines several ways in which cyber incidents may impact financial statement disclosures. Registrants will need to ensure that prevention costs, contingent losses, and customer incentives provided in the wake of an incident are properly recognized. A cyber incident may also result in diminished future cash flows and an accompanying impairment of assets such as goodwill, trademarks, or patents. Further, the reassessment of assumptions underlying the estimates made in preparing financial statements may be required, and registrants must explain the risk or uncertainty of a reasonably possible change in its estimates in the near-term that would be material to financial statements.

Disclosure Controls and Procedures: Finally, where cyber incidents pose a risk to a registrant’s ability to record, process or report information required in SEC filings, a registrant may consider whether this risk renders the registrant’s disclosure controls and procedures ineffective. As an example, the guidance highlights the situation where “if it is reasonably possible that information would not be recorded properly due to a cyber incident affecting a registrant’s information systems, a registrant may conclude that its disclosure controls are ineffective.”

Ultimately, the guidance underscores the important role that cybersecurity plays in business and the potential impact should cybersecurity be compromised. Given the number of ways in which cybersecurity threats or incidents may materially impact a business, registrants must carefully consider whether they are obligated to disclose such incidents through one or more of the six categories above.

Earlier this month, the U.S. Securities and Exchange Commission announced the approval of additional listing criteria for companies that become public through a reverse merger.

Under the new requirements, a reverse merger company will be unable to list on the NYSE, NYSE Amex or Nasdaq until the completion of a one-year "seasoning period" following the merger. During this period, the company must trade in the U.S. over-the-counter market or another regulated U.S. or foreign exchange. The company must also file with the SEC all required reports since the merger and would have to maintain a minimum share price for a sustained period immediately prior to its listing application. Exemptions to the new requirements, however, would be available in certain circumstances.

The U.S. Securities and Exchange Commission recently imposed a $1 million administrative penalty against Pipeline Trading Systems LLC for misleading investors in connection with the operation of its dark pool. Pipeline was launched in 2004 as an alternative trading system operating as a “crossing network” to facilitate trades among institutional investors while minimizing market impact associated with information leakage about their large buy or sell orders. To that end, Pipeline advertised that to prevent pre-trade information leakage, it would not reveal the side or price of a customer order before a trade was completed. Pipeline also claimed that all users were treated equally.

According to the SEC, Pipeline’s claims were false and misleading because one of its affiliates (a trading entity owned by its parent company) filled the vast majority of customer orders on Pipeline’s system, by seeking to predict the trading intentions of Pipeline’s customers and trade elsewhere in the same direction as customers before filling their orders on Pipeline’s platform. Accordingly, the SEC found that Pipeline generally did not provide the “natural liquidity” it advertised. The SEC further found that the trading affiliate was given certain advantages not available to other users. These included providing the affiliate with a FIX connection to Pipeline's graphical user interface known as the "Block Board", soliciting and receiving input from the affiliate regarding the minimum order size for each stock, and providing the affiliate with information regarding ATS features designed to "predator proof" the system.

The SEC release quotes Robert Khuzami, Director of the SEC’s Enforcement Division as saying that “[h]owever orders are placed and executed, be it on an exchange floor or in an automated venue, whether dark or displayed, one principle remains fundamental – investors are entitled to accurate information as to how their trades are executed.

Alternative trading systems compete with exchanges for trade execution by providing alternative operation models, trades types and fee structures to facilitate a wide range of execution strategies. Crossing systems or crossing networks generally do not offer price discovery but are intended to facilitate trades between buyers and sellers who quote their prices on other trading systems. Dark pools meanwhile, are trading systems that accept buy or sell orders without pre-trade transparency (disclosure of the details of the trade, specifically price and quantity).

Late last month, the U.S. SEC adopted a new rule to require registered investment advisers with at least $150 million in private fund assets under management to periodically file the new Form PF. The amount of information to be reported will depend on whether an adviser belongs to the "large adviser" or "small adviser" cateogry. The latter group, under which the SEC anticipates most advisers will fall, will have to file Form PF once per year. Only basic information regarding such things as size, leverage, investor types and concentration will be required. Large advisers will potentially report on a more frequent basis depending on whether they are a hedge fund, private equity fund or liquidity fund adviser, and will have to include more detailed information.

Meanwhile, commodity pool operators and commodity trading advisers that are dually registered with the CFTC will be able to satisfy certain CFTC filing requirements with respect to private funds, should the CFTC adopt such requirements, by filing the new reporting form with the SEC.

The new requirements represent another step in the implementation of Dodd-Frank. Most private fund advisers will be required to begin reporting following the end of their first fiscal year or quarter to end on or after December 15, 2012. However, certain advisers with at least $5 billion of assets under management will have to begin reporting following the end of their first fiscal year or quarter ending on or after June 15, 2012. Rules requiring the registration of private fund advisers were adopted by the SEC this past June.

In a judgment released earlier this month, the United States Court of Appeals for the Second Circuit found that the Financial Industry Regulatory Authority, which regulates securities firms doing business in the U.S., lacks the authority to bring court actions to collect disciplinary fines. The case, Fiero v. FINRA, involved FINRA's pursuit of unpaid fines subsequent to disciplinary action against the plaintiffs.

Specifically, the Court of Appeals found that while Section 15A(b) of the Securities Exchange Act of 1934 (the Exchange Act) provides self-regulatory organizations with the authority to discipline members by various means, including suspension, fine and censure, the legislation provides no express statutory authority for such organizations to bring judicial actions to actually collect fines. The Court found the statutory omission to be significant and intentional, and compared the provision to section 21(d) of the Exchange Act, which provides the SEC with express authority to seek judicial enforcement of penalties. In addressing the apparent enforcement gap created by FINRA's ability to levy but not pursue fines, the Court noted that FINRA can already enforce fines by the "draconian sanction" of revocation of a firm's registration.

A 1990 rule change purporting to authorize FINRA's collection of fines, meanwhile, was found to have been mischaracterized as a "house-keeping" rule when, in fact, it was a substantive change requiring publication of a notice and comment period. As such, the purported rule change "was never properly promulgated and cannot authorize FINRA to judicially enforce the collection of its disciplinary fines."

The SEC's final proxy rule amendments released last year also contained changes to Rule 14a-8, which were intended to narrow an exemption that currently permits companies to exclude shareholder proposals that relate to elections. Rule 14a-8a was not subject to court challenge. As we discussed at the time, the amended rules would apply to foreign issuers that were otherwise subject to U.S. proxy rules unless foreign law prohibited shareholders from nominating director candidates.

In its release last week, the SEC also confirmed that the amendments to Rule 14a-8 will come into force shortly. The SEC had stayed implementation of Rule 14a-8 along with Rule 14a-11 pending resolution of the court challenge to the latter.

The release is ultimately intended to assist the SEC in determining whether further regulation or guidance is needed to improve the regulatory regime with respect to funds' use of derivatives. To that end, the release considers, and requests comment on, such issues as: (i) the costs, benefits and risks of funds' use of derivatives; (ii) restrictions on leverage; (iii) portfolio diversification and concentration; (iv) exposure to securities-related issuers; and (v) the valuation of derivatives.

Comments are being accepted by the SEC for 60 days after the publication of the release in the Federal Register.

Meanwhile, the SEC also announced the adoption of rules to implement new registration exemptions for advisers with less than $150 million in private fund assets under management in the U.S. and those that qualify as "foreign private advisers". Under section 202(a)(30) of the Investment Company Act of 1940, foreign private advisers are provided an exemption from registration where the adviser (i) has no place of business in the U.S.; (ii) has fewer than 15 clients and investors in the U.S. in private funds advised by the investment adviser; (iii) has aggregate assets under management attributable to U.S. clients of less than $25 million; and (iv) does not hold itself out to the U.S. public as an investment adviser. The new rules define a number of terms contained in the legislation, such as "investor", "place of business" and "assets under management", in order to clarify the application of the exemption.

As we discussed in October, Canadian securities administrators have meanwhile been working on their own proposals relating to registration of foreign investment fund managers who manage Canadian funds or have fund investors in a Canadian province or territory. The comment period on these proposals closed on January 13, 2011 and pursuant to recent amendments to National Instrument 31-103 that just came into force on July 11, 2011, these fund managers have been given a further deferral from registration until September 2012.

On March 2, the U.S. Securities and Exchange Commission proposed a rule that would prohibit certain institutions with consolidated assets of $1 billion or more from establishing or maintaining incentive-based compensation arrangements that encourage executive officers, employees, directors or principal shareholders to expose the institution to inappropriate risks by providing excessive compensation, or that encourage inappropriate risks that could lead to material financial loss. The proposals would apply to institutions with consolidated assets of $1 billion or more and include brokers and dealers registered under Section 15 of the Securities Exchange Act of 1934 and investment advisers as defined under section 202(a)(11) of the Investment Advisers Act of 1940.

The proposal, which responds to a requirement by Dodd-Frankto prohibit such compensation arrangements, would also require the covered institutions to disclose information about their incentive-based compensation arrangements. The proposal will be open for a 45-day comment period once it is published in the Federal Register.

On January 25, the U.S. SEC proposed amendments to the definition of accredited investor in accordance with the Dodd-Frank Act. Specifically, under the SEC's proposal, while an individual would still need to have a net worth of at least $1 million, individually or jointly with a spouse, to meet the threshold, the amended requirements would now exclude the value of the individual's primary residence from the calculation. Comments on the proposal are being accepted until March 11, 2011.

Yesterday, the SEC announced that it was adopting rule amendments that would require issuers to conduct: (i) a shareholder advisory vote to approve the compensation of executives at least once every three calendar years beginning with the first annual shareholders' meeting taking place on or after January 21, 2011; (ii) a shareholder advisory vote on the frequency of executive compensation votes at least once every six calendar years; and (iii) a shareholder advisory vote on golden parachute arrangements in connection with merger transactions. The amendments to the Securities Exchange Act of 1934 would also impose various disclosure requirements. Smaller reporting companies, however, would not be subject to the first two requirements described above until their first annual or other meeting of shareholders occurring on or after January 21, 2013.

The U.S. SEC proposed rules last week that would require domestic and foreign issuers that must file annual reports with the SEC and that engage in the commercial development of oil, natural gas, or minerals, to disclose certain payments made to the U.S. and foreign governments. The types of payments that would have to be disclosed include taxes, royalties, fees and bonuses. The proposed rules stem from Dodd-Frankamendments to the Securities Exchange Act of 1934. The SEC is accepting comments on the proposed rules until January 31, 2011.

On November 19, the SECannouncednew rules to give effect to provisions of Dodd-Frankthat amend the Investment Advisers Act of 1940. Specifically, the provisions include increasing the asset threshold for advisers to register with the SEC and repealing the private adviser registration exemption. Private advisers able to rely on one of the new exemptions from registration under Dodd-Frank, however, would still be required to satisfy certain reporting requirements.

The SEC also proposed rules to implement the new exemptions under Dodd-Frank, including one available to investment advisers that solely advise private funds if the adviser has assets under management in the United States of less than $150 million. A further exemption would be available to foreign private advisers that: (i) have no place of business the United States; (ii) have fewer than 15 U.S. clients and private fund investors; (iii) have less than $25 million in aggregate assets under management from U.S. clients and private fund investors; and (iv) do not hold themselves out generally to the public in the U.S. as an investment adviser. The SEC's proposals would also clarify the application of this exemption by defining a number of terms in the statutory definition of foreign private adviser.

On November 19, the U.S. Securities and Exchange Commissionproposed new rules that would require security-based swap data repositories (SDRs) to register with, and provide swap data to, the SEC. The proposal would also require SDRs to accept transaction data and maintain it for at least five years after the expiration of the applicable swap. The SEC has also proposed rules requiring parties to security-based swap transactions to report information regarding each transaction to a registered SDR, which would then be required to publicly disseminate certain information regarding the transaction. The proposals are being made pursuant to Dodd Frank, which authorizes the SEC to regulate security-based swaps. According to the SEC, "[t]aken together, the rules ... seek to provide improved transparency to regulators and the markets through comprehensive regulations for [security-based swaps] transaction data and SDRs." Meanwhile, the Commodity Futures Trading Commission is planning on similar rules with respect to swaps falling under its jurisdiction.

Last week, the U.S. SEC announced that it was extending the date for compliance with its new short sale rule. The change in date is intended to provide more time for exchanges to modify their procedures and market participants to program and test systems for implementation. The new rule, which will restrict the prices at which a stock can be sold short if the stock's price 10% or more in one day, will now take effect on February 28, 2011.

The U.S. Securities and Exchange Commission (SEC) last week released a proposal that, among other things, would require issuers that are subject to federal proxy rules to conduct: (i) a shareholder advisory vote to approve the compensation of executives at least once every three years; (ii) a shareholder advisory vote on the frequency of executive compensation votes at least once every six years; and (iii) a shareholder advisory vote on golden parachute arrangements in connection with merger transactions. The SEC's proposal, which result from an amendment to the Securities Exchange Act of 1934 emanating from the recent Dodd-Frank Act, would also impose various disclosure requirements.

Meanwhile, further proposals would require institutional investment managers that manage certain equity securities having an aggregate fair market value of at least $100 million to annually report to the SEC on how they voted proxies relating to the matters described above, namely, executive compensation, the frequency of say-on-pay votes and "golden parachute" arrangements.

The SEC is accepting public comments on the proposals until November 18.

The Securities and Exchange Commission (SEC) issued a proposal this week to require issuers of asset-backed securities to perform a review of the assets underlying the relevant securities and publicly disclose the review's findings and conclusions. While the proposal would not dictate the level or type of review to be performed, the SEC expects that the "issuer's level and type of review ... may vary depending on the circumstances." The SEC is accepting public comment on its release until November 15.

The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) released a joint report on Friday outlining their findings respecting the extreme market volatility of May 6, 2010. According to the report, the rapid execution of an automated sell program concerning a large number of futures contracts by a large fundamental trader during a time of high volatility and thinning liquidity was a main contributor to the day's events. The selling pressure from the automated sell program helped cause a liquidity crisis in the contracts and in individual securities.

Meanwhile, CFTC Chairman Gary Genslerstated yesterday that a joint committee of the CFTC and SEC has been asked to consider the report and make recommendations. Mr. Gensler specifically mentioned that he expects to hear recommendations with respect to: (i) requiring executing brokers to have an obligation to enter and exit in an orderly manner; (ii) increasing visibility into the full order book, either in aggregate or in detail; and (iii) potential revisions to market pauses, either for single exchanges or for cross-market circuit breakers.

On September 28, the U.S. Financial Industry Regulatory Authority (FINRA) announced that it will file a rule proposal with the Securities and Exchange Commission next month that will allow investors to opt for all-public panels in arbitration claims. According to FINRA, "[g]iving each individual investor the option of an all-public panel will enhance confidence in and increase the perception of fairness in the FINRA arbitration process".

In order to prevent selective disclosure, Regulation FD requires public disclosure of any material nonpublic information that is provided by an issuer or those acting on its behalf to certain enumerated persons, including securities market professionals. In order to implement Section 939B of the Dodd-Frank Act, Regulation FD is being amended to remove Rule 100(b)(2)(iii) of Regulation FD, which generally exempts issuers from having to make such disclosure if the material nonpublic information is provided to a credit rating agency under certain circumstances. Given the Dodd-Frank Act imposes a 90-day deadline for this amendment, the amendment will be effective for disclosure made on or after its publication in the Federal Register.

As we discussed back in July, the Canadian Securities Administrators have published a proposed rule that would impose greater regulatory oversight for designated credit rating agencies and organizations under proposed National Instrument 25-101 Designated Rating Organizations. While specific amendments are not contemplated at this time, the CSA have asked for comments on whether it is still appropriate to exempt credit rating organizations from assuming statutory liability for their opinions by not requiring them to file an "expert's consent" where a rating is referred to in prospectus or other disclosure. The CSA is taking comments on proposed NI 25-101 until October 25, 2010.

Last week, the U.S. Securities and Exchange Commission (SEC) announcedproposals intended to "shed a greater light" on the short-term borrowing practices of public companies. Specifically, the proposals would require all companies that provide MD&A disclosure to provide quantitative information regarding: (i) the amount of short-term borrowings outstanding at the end of the reporting period and the weighted average interest rate on those borrowings; (ii) the average amount outstanding during the period and the weighted average interest rate on those borrowings; and (iii) the maximum month-end amount of short term borrowings during the reporting period. With respect to the last requirement, financial companies would have to provide the maximum daily, rather than month-end, amount of short-term borrowings. Companies would also be required to provide quantitative information regarding the arrangements of their short-term borrowings.

Of particular note for Canadian companies, foreign private issuers, other than MJDS filers, would be subject to substantially similar requirements, but without the requirement for quarterly reporting. MJDS filers, however, would be unaffected by the proposals.

According to SEC Chairman Mary Schapiro, "[u]nder these proposed rules, investors would have better information about a company's financing activities during the course of a reporting period - not just a period-end snapshot." As such, investors "would be able to evaluate the company's ongoing liquidity and leverage risks." Comments on the proposals are being accepted by the SEC for 60 days after their publication in the Federal Register.

On September 10, the Securities and Exchange Commission (SEC) approved new rules to expand its circuit breaker pilot program, which currently applies to stocks listed in the S&P 500 Index, to all stocks in the Russell 1000 Index and certain exchange-traded funds. As we discussed in our post of May 19, the SEC's circuit breaker is tripped and stops trading in a security for a five-minute period if the security experiences a 10 percent price change over the preceding five minutes.

The SEC also approved rules clarifying the process for breaking erroneous trades. We discussed generally the nature of the SEC's original proposal in our post of June 18.

Non-U.S advisers of private investment funds will, under certain circumstances, be required to register with the SEC, which will lead to new substantive requirements for such advisers.

Further rule-making by U.S. regulators under the authority of Dodd-Frank will likely also affect Canadian issuers. For example, the SEC's new proxy rules will, under certain circumstances, apply to foreign issuers that are otherwise subject to U.S. proxy rules.

As can be seen, the long arm of financial regulatory reform in the U.S. may very well reach Canadian issuers. For that reason, issuers in this country should keep abreast of developments as they come to light.

During a speech to the Economic Club of New York yesterday, U.S. Securities and Exchange Commission Chairman Mary Schapiro discussed the "flash crash" of May 6 and the steps taken by the SEC to strengthen equity market structure. Ms. Schapiro also outlined further steps that may be considered, including: (i) improving circuit breaker mechanisms; (ii) high frequency trading and whether the firms that effectively act as market makers during normal times should have any obligation to support the market in reasonable ways during "tough times"; (iii) order cancellations and whether large volumes of orders, subsequently cancelled, affect price discovery, capital formation and the capital markets generally; and (iv) market fragmentation and dark trading venues.

According to Ms. Schapiro,

The important questions are "to what extent is our structure meeting or failing to meet its goals of fair, efficient and transparent markets, and how can we modify the structure to preserve the advantages and eliminate the flaws?"

As we wrote on August 26, the U.S. Securities and Exchange Commission recently released a proxy rule that will require companies, under certain circumstances, to include shareholder nominees for director in the company's proxy materials. While SEC Chairman Mary Schapiro outlined the the rule's benefits, SEC Commissioner Troy A. Paredes provides an alternative viewpoint. Mr. Paredes argues that the rule is flawed in that it "imposes a minimum right of proxy access, even when shareholders may prefer a more limited right of access or no proxy access at all." Further comments by the commissioners can be found here.

Earlier this week, the U.S. Securities and Exchange Commission (SEC) releaseda report cautioning nationally recognized credit rating agencies about "deceptive ratings conduct and the importance of sufficient internal controls over the policies, procedures, and methodologies the firms use to determine credit ratings." The report stems from an investigation into whether Moody's Investor Service, Inc. violated federal registration or antifraud provisions. The SEC also stated in the report that it will utilize new provisions in the Dodd-Frank Act "for enforcement actions alleging otherwise extraterritorial fraudulent misconduct that involves significant steps or foreseeable effects within the United States."

The U.S. Securities and Exchange Commission (SEC) yesterday announced that it is amending federal proxy rules in order to "facilitate the effective exercise of shareholders' traditional state law rights to nominate and elect directors to company boards of directors." Specifically, a new proxy rule (Rule 14a-11 under the Securities Exchange Act of 1934) will, under certain circumstances, require companies to include shareholder nominees for director in the company's proxy materials. An ownership threshold of 3% of the voting power based on securities that are entitled to be voted, held for at least three years, will be required for a nominating shareholder or group to rely on Rule 14a-11. Further, amendments to Rule 14a-8 will narrow an exception that currently permits companies to exclude shareholder proposals that relate to elections. The final rules take into account public response to the draft proposals released by the SEC in July 2009 and will generally be effective 60 days after their publication in the Federal Register.

In describing the need for the new rules, SEC Chairman Mary Schapiro stated that

[a]s a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own...Nominating a director candidate is not the same as electing a candidate to the board. I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfill the responsibilities of serving as a director. The critical point is that shareholders have the ability to make this choice.

Notable to Canadian companies, the amended rules will apply to foreign issuers that are otherwise subject to U.S. proxy rules unless the applicable foreign law prohibits shareholders from nominating director candidates.

With the recent approval of financial regulatory reform legislation in the United States, SEC Chairman Mary Schapiro provided an outline of next steps in a speech last week to the Center for Capital Markets Competitiveness in Washington D.C. Specifically, Ms. Schapiro discussed five topics that new rules will need to address, namely, (i) oversight of OTC derivatives and the need for joint rulemaking between the CFTC and SEC; (ii) fiduciary duty in respect of existing standards of care applicable to broker-dealers and investment advisors; (iii) registration requirements for hedge funds, (iv) expanded corporate disclosure, including upcoming rules that will set new standards of independence for compensation committees; and (v) credit rating agencies. According to Ms. Schapiro, the next year will a busy one for the SEC and CFTC as a number of new proposals are introduced.

The U.S. Securities and Exchange Commission (SEC) announced last week that Goldman, Sachs & Co. had agreed to pay $550 million to settle charges that the company had misled investors respecting a subprime mortgage product. The settlement also requires remedial action by Goldman Sachs with respect to the company's review and approval of certain mortgage securities offerings and additional education and training of employees in this area of the company's business. For more on the case and settlement, see this article from the New York Times.

The U.S. Securities and Exchange Commission (SEC) announced yesterday proposed amendments to the Financial Industry Regulatory Authority rules respecting clearly erroneous transactions in exchange-listed securities. Under the current rules, a trade may be found to be clearly erroneous where the price of a transaction deviates from the consolidated last sale price for the security beyond a specified amount. These thresholds depend on the consolidated last sale price of the security and whether trading occurs during or outside normal market hours. For example, where the price of a security is up to $25, a deviation of 10% or more during normal market hours would be considered clearly erroneous.

The amendments would, among other things, establish different thresholds and standards to handle large-scale market events and would remove FINRA's flexibility to use different thresholds in unusual circumstances. In circumstances of a multi-stock event involving 20 or more securities, FINRA may use a reference price other than the consolidated last sale and will nullify transactions at prices equal to, or greater than, 30% of the reference price.

In our post of May 19, we discussed the recent SEC proposals that would see a five minute pause to trading in individual stocks that experienced a 10 percent change in price over a five minute period. On June 4, the SEC issued a statement stating that staff is reviewing comments received and that staff expects to present proposals this week.

Citing the lack of a central database containing comprehensive and readily accessible data regarding orders and executions, the U.S. Securities and Exchange Commission proposed a new rule on May 26 that would require SROs to establish a consolidated audit trail system. Under the new system, exchanges and FINRA, as well as their members, would be required to provide certain information to the central repository regarding each quote and order in a National Market System (NMS) security.

Such a consolidated system would be intended to: (i) provide regulators direct and timely access to uniform consolidated order and execution information for all orders in NMS securities from all participants across all markets; (ii) enable SROs to better fulfill their regulatory responsibilities to oversee their markets and members; and (iii) enable the SEC to better carry out its oversight of the NMS for securities.

The SEC is accepting public comments on the proposal for 60 days after its publication in the Federal Register.

As we discussed yesterday, recent media reports suggested that the U.S. Securities and Exchange Commission (SEC) was planning to announce proposals for new circuit breaker rules to address issues stemming from the market volatility of May 6. Such proposals were subsequently announced late yesterday afternoon.

Under the proposed rules, which reflect a consensus among the various U.S. stock exchanges and the Financial Industry Regulatory Authority (FINRA), trading in a stock would be paused for five minutes where the stock experienced a 10 percent change in price over a five minute period. The five minute pause would be intended to "give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price and resume trading in a fair and orderly fashion." If approved by the SEC after the comment period, the new rules would be in effect on a pilot basis through December 10, 2010, during which time SEC staff would study, among other things, the impact of other trading protocols.

The SEC and Commodity Futures Trading Commission (CFTC) also released their preliminary findings yesterday regarding the "unusual market events" of May 6. While the events of that day continue to be reviewed, the report focuses on the following "hypotheses and findings": (i) the possible linkage between the decline in the prices of stock index products and the simultaneous and subsequent waves of selling in individual securities; (ii) a generalized severe mismatch in liquidity; (iii) the extent to which the liquidity mismatch may have been exacerbated by disparate trading conventions among various exchanges; (iv) the need to examine the use of "stub quotes"; (v) the use of market orders, stop loss market orders and stop loss limit orders that, coupled with sharp price declines, might have contributed to market instability; and (vi) the impact on Exchange Traded Funds.

The Globe and Mail is reporting today that new circuit breaker rules will soon be introduced by the U.S. Securities and Exchange Commission in an attempt to prevent the type of market volatility seen on May 6th. According to the Globe, the circuit breakers may be operational as early as June 14.

Today, the SEC and Commodity Futures Trading Commission announced the formation of a joint committee to address "emerging regulatory issues", with the first item on the committee's agenda being a review of last Thursday's market events. Meanwhile, SEC Chairman Mary Schapirotestified before the Financial Services Committee's Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises this afternoon to summarize the events of May 6, provide an overview of the current market structure and discuss various regulatory tools to be considered "in determining how best to maintain fair and orderly financial markets and to prevent severe market disruptions in the future."

The U.S. Financial Industry Regulatory Authority (FINRA) yesterday published guidance regarding the suitability, disclosure and other obligations of broker-dealers recommending securities in offerings made under the SEC's Regulation D (private placements). While Regulation D provides exemptions from the registration requirements of the Securities Act of 1933, FINRA's notice stresses that broker-dealers must still conduct a reasonable investigation of the issuer and the securities being recommended and comply with other applicable requirements, including suitability and advertising and supervisory rules. Specifically, the notice provides a list of best practices that have been adopted by other firms.

The U.S. Securities and Exchange Commission (SEC) yesterday proposed creating a "large trader" reporting system that would identify large market participants, collect information regarding their trades and analyze their trading activity. Traders would generally be considered to fit the "large trader" categorization where their transactions in exchange-listed securities equalled or exceeded two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month. The proposals would require such traders to identify themselves to the SEC and impose recordkeeping and reporting obligations on the part of broker-dealers.

Meanwhile, the SEC also proposedextending two investor protection measures, currently existing in stock markets, to options markets. Specifically, the SEC proposed prohibiting an option exchange from unfairly impeding access to displayed quotes and limiting the fees that an options exchange can charge those wishing to access a quote.

Comments on the proposals are being accepted for 60 days after their publication in the Federal Register.

On April 7, the U.S. Securities and Exchange Commission (SEC) announcedproposals to revise the rules respecting asset-backed securities in order to "better protect investors in the securitization market." Specifically, the proposals would make changes to the offering process, disclosure and reporting for asset-backed securities (ABS). The changes are described by the SEC as being comprehensive and imposing new burdens in order to "provide investors with timely and sufficient information...reduce the likelihood of undue reliance on credit ratings, and help restore investor confidence in the representations and warranties regarding the assets." Comments on the proposals are being accepted by the SEC for 90 days after publication of the proposals in the Federal Register.

Meanwhile, the International Organization of Securities Commissions (IOSCO) released a report yesterday entitled "Disclosure Principles for Public Offerings and Listings of Asset Backed Securities". The report is intended to "provide guidance to securities regulators who are developing or reviewing their regulatory disclosure regimes for public offerings and listings of asset-backed securities (ABS)." Specifically, the report outlines the information that should be included in any offer or listing document for a publicly offered or listed ABS.

In particular, the notice-and-access provisions would allow reporting issuers to post information circulars on a website (non-SEDAR) and send a notice to beneficial owners informing them that the proxy-related materials have been posted. An explanation of how to access the material and a voting instruction form would be included with the notice. The CSA also highlighted the differences between its proposals and the U.S. model for notice-and-access. Despite the differences, however, SEC issuers would be permitted to use the U.S. process to comply with CSA requirements.

The CSA are accepting comments on its proposals until August 31, 2010 and have specifically invited comments on a number of questions, primarily relating to notice-and-access.

On February 17, the U.S. Financial Industry Regulatory Authority (FINRA) filed proposed changes to its Rules with the SEC intended to prohibit abuses in the allocation and distribution of shares in IPOs. The release amends earlier FINRA proposals by addressing issues raised by comments to its earlier proposed changes. The SEC published the proposed amendments for comment on March 11.

The U.S. SECannounced on March 25 that its staff is conducting a review of the use of derivatives by mutual funds, exchange-traded funds (ETFs) and other investment companies to determine whether additional protections for those funds are required under the Investment Company Act of 1940 (the Act) . Staff of the SEC also intend to identify if any changes to the SEC's rules or guidance may be warranted. Pending the completion of the review, SEC staff will be deferring consideration of exemptive requests under the Act to permit ETFs that would make significant investments in derivatives.

The U.S. Securities and Exchange Commission published a staff legal bulletin on March 15 providing the views of its Division of Corporation Finance respecting the circumstances under which issuers may suspend their reporting obligations under section 15(d) of the Securities Exchange Act of 1934by relying on Rule 12h-3. Citing the routine nature of no-action requests by issuers, the large body of no-action precedent and the guidance in the bulletin, the Division is of the view that, on a going-forward basis, issuers that fit within the situations identified by the bulletin and that satisfy the relevant conditions do not need a no-action response before filing the applicable form to suspend its section 15(d) reporting obligations.

On February 22, the U.S. Securities and Exchange Commission (SEC) announced that it was amending its proxy rules to improve the "notice and access" model for furnishing proxy materials to shareholders. Under the model, issuers are permitted to post their proxy materials on the internet and send shareholders a "Notice of Internet Availability of Proxy Materials" (a Notice), directing shareholders to the website where the proxy materials may be found, in lieu of delivering a full set of proxy materials in paper accompanied by the above Notice. While the notice and access model, adopted in 2007, was intended to promote the use of the internet as a cost-efficient and reliable means of making proxy materials available to shareholders, the SEC has found lower shareholder response rates to proxy solicitations when the notice-only option is employed.

The SEC attributes the lower response rate in cases where the notice-only option is used to confusion among investors regarding the operation of the notice and access model. Thus, issuers and other soliciting persons will be provided additional flexibility under the amendments with respect to the format and content of the Notice, including being able to provide additional materials explaining the e-proxy rules, rather than being restricted to inclusion of the boilerplate-type language currently set out by the rules. Changes are also being made with respect to the time by which a soliciting person other than an issuer must send its Notice to shareholders. The effective date of the amendments, first proposed in October 2009, is March 29, 2010.

In addition to the introducing the above amendments, the SEC also published an Alert describing changes that went into effect in January 2010 eliminating discretionary voting by brokers in the election of directors and the effects of these changes on proxy voting. The SEC also launched a new website providing investors with general information respecting, among other things, proxy voting and e-proxy rules.

Specifically, the final rules intend to improve the information that companies provide to shareholders regarding: (i) risk, by requiring disclosure respecting the board's role in risk oversight and, where relevant, disclosure respecting compensation policies and practices that are likely to expose the company to material risk; (ii) governance and director qualifications, by requiring expanded disclosure of the background and qualifications of directors and nominees, as well as disclosure concerning a company's board leadership structure; and (iii) compensation, by amending the reporting of stock and option awards and requiring, in certain circumstances, the disclosure of compensation consultants' potential conflicts of interest.

The U.S. Securities and Exchange Commission (SEC) announced in January that it was seeking public comment on issues respecting the current equity market structure. In publishing the concept release, the SEC specifically cited the dramatic change in the secondary market for equities in recent years and the trend towards a market structure with primarily automated trading. Thus, the SEC intends to assess "whether market structure rules have kept pace with, among other things, changes in trading technology and practices". The release seeks specific comment on issues such as market quality metrics, the fairness of market structure, high frequency trading, co-location services and dark liquidity. The SEC will use the comments received to help determine whether additional regulatory measures are needed to improve the current equity market structure. Further, the SEC also proposed for public comment a new market structure initiative that is intended to strengthen the risk management control of broker-dealers that provide market access.

The U.S. Securities and Exchange Commission (SEC) yesterday announced the adoption of rule amendments to "substantially increase the protections" for investors that trust their assets with SEC-registered investment advisers. Depending on the investment adviser's custody arrangement, the rules would require (i) advisers to engage independent public accountants to conduct annual surprise exams to verify that client assets exist; and (ii) a written custody control review that "describes the controls in place at the custodian, tests the operating effectiveness of those controls and provides the results of those tests" when the adviser or affiliate acts as custodian of client assets. The amended rules would also impose new controls on advisers to hedge funds and other private funds that comply with the custody rule. Such advisers would have to obtain an audit of the fund and deliver the fund's financial statements to fund investors, while the auditor would have to be registered with and subject to inspection by the Public Company Accounting Oversight Board.

According to SEC Chairman Mary Schapiro, "[t]hese new rules will apply additional safeguards where the safeguards are needed most - that is, where the risk of fraud is heightened by the degree of control the adviser has over the client’s assets."

As described in our post of October 21, the U.S. Securities and Exchange Commission (SEC) recently voted to propose measures intended to increase the transparency of private automated trading systems known as "dark pools". On November 13, the SEC published its proposed rules and amendments to joint-industry plans. The proposals would: (i) amend the Exchange Act quoting requirements so as to apply expressly to actionable "Indications of Interest", which are similar to a typical buy or sell quote and permit others to trade; (ii) revise the order display requirements of Regulation ATS, including a substantial lowering of the trading volume threshold that triggers public display obligations for alternative trading systems; and (iii) amend the joint-industry plans for publicly disseminating consolidated trade data to require real-time disclosure of the identity of dark pools and other alternative trading systems on the reports of their executed trades.

On November 4, Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission (SEC), gave a speech in New York in which she described the SEC's recent initiatives related to proxy voting. Specifically, Ms. Schapiro discussed proposals respecting shareholder director nominations, proxy enhancements and e-proxy revisions. She also stated that SEC staff is currently conducting a comprehensive review of the mechanics of proxy voting with a view to ensuring that the proxy voting system "operates with the degree of reliability, accuracy, transparency and integrity that shareholders and companies have the right to expect."

On October 27, the U.S. House Committee on Financial Servicesannounced the introduction, in conjunction with the Treasury Department, of draft legislation intended "to address the issue of systemic risk and 'too big to fail' financial institutions." Specifically, the legislation would establish a "Financial Services Oversight Council" to identify financial companies and financial activities that should be subject to "heightened prudential standards in order to promote financial stability and mitigate systemic risk". A variety of options would be available to regulators in response to identified risks and according to the release, the proposed legislation would provide "for the orderly wind-down of failing firms" to ensure that "industry and shareholders absorb the risks and costs of failure, not taxpayers."

Secretary of the Treasury Timothy Geithner, meanwhile, testified yesterday before the House Committee on Financial Services regarding the draft legislation. Secretary Geithner cited the five key elements necessary for reform, being: (i) the orderly resolution of failing financial institutions; (ii) no open-bank assistance to failing financial institutions; (iii) protecting taxpayers from losses; (iv) limiting the Federal Reserve's and the FDIC's emergency authorities; and (v) stronger constraints on size and leverage. According to Secretary Geithner, "the test for any effective set of reforms" is whether the above elements are included. According to the Secretary, the draft legislation "meets that test."

The U.S. Securities and Exchange Commission (SEC) today voted to propose measures to increase transparency of private automated trading systems known as "dark pools". Such private systems do not display quotes in the public quote stream and, according to the SEC, the lack of transparency associated with dark pools could create a "two-tiered market that deprives the public of information about stock prices and liquidity." As such, the SEC's proposals include requiring the public disclosure of information regarding "Indications of Interest" (IOIs), which are similar to a typical buy or sell quote and permit others to trade. As described in our post of June 19, SEC Chairman Mary Schapiro has discussed the need to regulate dark pools in the past, while in Canada, regulators recently published a consultation paper on the subject.

The SEC is inviting public comments on the proposals, which have yet to be published on the SEC website, for 90 days after their publication in the Federal Register. For more information, see the text of Ms. Schapiro's speech before the SEC's open meeting as well as the SEC fact sheet on the subject.

The Senior Supervisors Group, consisting of financial supervisors from nine different countries, including the U.S. Securities and Exchange Commission and the Office of the Superintendent of Financial Institutions (Canada), issued a report today (October 21) titled "Risk Management Lessons from the Global Banking Crisis of 2008". The report identifies deficiencies in the "governance, firm management, risk management, and internal control programs that contributed to, or were revealed by, the financial and banking crisis of 2008." The weaknesses identified in the report include the failure of some boards and managers to establish and adhere to acceptable levels of risk, as well as compensation programs that "conflicted with the control objectives of the firm". Despite recent progress in improving risk management practices at financial firms, the report concludes that weaknesses remain that still need to be addressed.

Earlier today, the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) issued a joint report on the issue of regulatory harmonization. The report follows joint meetings held in early September and makes a series of recommendations on such issues as oversight and enforcement, investor and customer protection, compliance and the improvement of coordination and cooperation between the agencies.

Of particular note, the report recommends that the SEC "review its approach to cross-border access to determine whether greater efficiencies could be achieved with respect to cross-border transactions in securities..." Specifically, the report states that the SEC may consider amendments to Rule 15a-6 of the Securities Exchange Act of 1934regarding the interaction of U.S. investors with foreign broker-dealers.

On October 1, the U.S. House Committee on Financial Servicesreleased, among other bills, a discussion draft of the Investor Protection Act. The IPA is intended to strengthen the powers of the Securities and Exchange Commission, while enhancing the SEC's enforcement powers and funding. Further, under the draft bill, all financial intermediaries that provide advice would have a fiduciary duty toward their customers and the SEC would also be granted the authority to prohibit or impose limitations on arbitration clauses respecting customer contracts.

On October 2, meanwhile, the Committee circulated a discussion draft of legislation intended to regulate over-the-counter derivatives. According to a committee member, the OTC bill "moves us in the right direction by reducing risk to the economy with robust and dynamic oversight of major market participants, while preserving appropriate risk-management tools for end users." The Committee is began meeting yesterday to discuss the OTC bill.

The U.S. Securities and Exchange Commission (SEC) yesterday released for public comment a draft Strategic Plan outlining its mission, values and strategic goals for fiscal years 2010 to 2015. The identified goals include fostering and enforcing compliance with federal securities laws, establishing an effective regulatory environment, facilitating access to information that investors need to make informed investment decisions and enhancing the SEC's performance. Desired outcomes are discussed and the SEC also identified performance metrics by which to measure its progress.

The U.S. Securities and Exchange Commission (SEC) also voted yesterday to take a number of measures with the intent of increasing the oversight of credit ratings agencies. Among other things, the SEC decided to: (i) adopt rules to provide greater information respecting ratings histories; (ii) propose amendments to require annual compliance reports; and (iii) propose new rules that would require the disclosure of information respecting what a credit rating covered, any material limitations on the scope of the rating and whether "ratings shopping" had occurred. Public comments are being accepted by the SEC for 60 days from the publication of the amendments by the Federal Register.

The U.S. Securities and Exchange Commission yesterday proposed a ban on flash trading, a practice that allows certain market participants to access information about the best available prices before the public is given an opportunity to trade. According to SEC Chairman Mary Schapiro, flash orders "provide a momentary head-start in the trading arena that can produce inequities in the markets and create disincentives to display quotes." Public comments on the amendments, which have yet to be published, are being accepted by the SEC until 60 days following their publication in the Federal Register.

The U.S. Securities and Exchange Commission (SEC) and the U.K. Financial Services Authority (FSA) announced plans today "to explore common approaches to reporting and other regulatory requirements for key market participants such as hedge funds and their advisers." Specifically, the two regulators "agreed to identify a common, coherent set of data to collect from hedge fund advisers/managers" in order to help the regulators identify risks to their regulatory mandates and objectives. The announcement, subsequent to a meeting between the SEC and FSA, stated that discussions also included OTC markets and central clearing, accounting issues, regulatory reform, credit agency oversight, short selling and corporate governance and compensation practices. Today's release follows an announcement by the U.S. Commodity Futures Trading Commission (CFTC) yesterday that the CFTC had signed a memorandum of understanding with the FSA "to enhance cooperation and the exchange of information relating to the supervision of cross-border clearing organizations."

Yesterday, the U.S. Securities and Exchange Commission (SEC) announced the creation of its new Division of Risk, Strategy, and Financial Innovation, which combines the Office of Economic Analysis, the Office of Risk Assessment and certain other functions. According to the SEC, the new division will "provide the Commission with sophisticated analysis that integrates economic, financial, and legal disciplines." The three broad areas that fall under the new division's responsibilities are risk and economic analysis, strategic research and financial innovation.

On August 17, 2009, the U.S. Securities and Exchange Commissionre-opened the comment period on its proposals respecting short sales first published in April. The comment period was extended to allow for supplemental comments on an alternative uptick rule that was not previously specifically subject to the request for comments. In April, the SEC sought comments on proposals that represented two approaches to imposing restrictions on short selling; the first to apply on a market-wide and permanent basis and the second during severe market declines only. With respect to the proposed market-wide and permanent rules, two alternative short sale price tests were proposed. The first was based on the current national best bid (proposed modified uptick rule) and the second based on the last sale price (proposed uptick rule). While the April proposals did not specifically seek comments on the alternative uptick rule, which would permit short selling only at a price at or higher than the current national best bid, it did enquire whether it would be preferable to the proposed modified uptick rule and the proposed uptick rule.

Under the alternative uptick rule, in an advancing or declining market, short selling would generally only be permitted at an increment above the current national best bid. The alternative uptick rule proposal is slightly different from April's proposed modified uptick rule (and the proposed uptick rule), in that only allowing short selling at an increment above the national best bid would not allow short sale to get immediate execution and would, therefore, restrict short selling to a greater extent than the other two proposed rules. It would not, however, require monitoring the sequence of bids or last sale prices. According to the SEC’s press release, this alternative uptick rule would, as a result, be easier to monitor. The comment period for the proposal will extend for 30 days from the date of publication of the proposal in the Federal Register.

The Securities and Exchange Commission'sInvestor Advisory Committee, having held its first meeting on Monday, announced today that it has agreed on a broad agenda. Identified topics for discussion moving forward include: the fiduciary duties of financial intermediaries, disclosures to investors, whether majority voting for directors should be mandatory for all U.S. companies and whether investors have the information necessary to make informed proxy voting decisions.

The U.S. Department of the Treasuryannounced on Monday that it was delivering to Congress proposed legislation intended to address the situation of recent years where "investors were overly reliant on credit rating agencies that often failed to accurately describe the risk of rated products." Under the proposed legislation and rules to be adopted by the Securities and Exchange Commission, credit rating agencies would, among other things, have to register with the SEC and be subject to a higher degree of oversight, they would be prohibited from providing consulting services to companies that contract for ratings, agencies would be required to manage and disclose conflicts of interest and preliminary ratings would have to be publicly disclosed to reduce "ratings shopping". According to the Treasury Department's fact sheet, the proposals will "increase transparency, tighten oversight, and reduce reliance on credit rating agencies."

While some hedge fund managers are currently subject to regulation as “investment advisers” by the SEC under the Investment Company Act of 1940, the majority operate outside the ambit of the SEC as they are organized to qualify for exemptions from registration requirements that generally apply to managers of similar types of investment vehicles, such as mutual funds. The proposed legislation, however, would impose registration requirements on advisers to private investment funds with more than $30 million of assets under management. Funds would be subject to various obligations with respect to financial reporting, conflict of interest prohibitions and increased disclosure requirements. According to the Treasury Department's press release, the new legislation "would help protect investors from fraud and abuse, provide increased transparency, and provide the information necessary to assess whether risks in the aggregate or risks in any particular fund pose a threat to our overall financial stability.

The U.S. Securities and Exchange Commission has now published proposed amendments to its rules in order to "improve the disclosure shareholders of public companies receive regarding compensation and corporate governance, and facilitate communications relating to voting decisions." The proposals, announced earlier this month, would expand the scope of compensation disclosure and analysis to require disclosure of a company's overall compensation program as it related to risk management. Disclosure requirements regarding the qualifications of directors and nominees would also be extended and certain issues relating to the solicitation of proxies and the granting of proxy authority would be clarified. Comments on the proposals are being accepted by the SEC until September 15, 2009.

Chairman Mary Schapiro of the Securities and Exchange Commission (SEC) testified before the House Committee on Financial Services' Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises yesterday respecting the SEC's "role in helping to address the financial crisis" as well as the actions being taken "to improve investor protection and restore confidence" in financial markets. In her testimony, Ms. Schapiro provided an overview of the SEC's recent work and its accomplishments during her tenure at the Commission and outlined the steps the SEC is taking to address ongoing issues, including strengthening examination and oversight, improving transparency and investor protection, combating abusive short selling, enhancing the regulation of credit rating agencies and strengthening shareholder rights. Of interest, Ms. Schapiro noted that the SEC's most recent proposals regarding the regulation of short sales resulted in over 3,700 comment letters, which are currently being reviewed by SEC staff.

Citing the "enormous scale" and "critical role" of over-the-counter (OTC) derivatives in the financial markets, U.S. Treasury Secretary Timothy Geithner outlined the steps the Obama Administration intends to take to regulate OTC derivatives in testimony to Congress on July 10. The steps include: (i) requiring that all standardized derivative contracts be cleared through well-regulated central counterparties and executed either on regulated exchanges or regulated electronic trade execution systems; (ii) encouraging greater use of standardized OTC derivatives through capital requirements and other measures to facilitate migration of such derivatives onto central clearinghouses and exchanges; (iii) requiring all OTC derivative dealers and other major market participants to be subject to supervision and registration; (iv) making OTC derivative markets fully transparent by the imposition of recordkeeping and reporting requirements; (v) providing the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) with authority to enforce the regulation of OTC derivative markets; (vi) working with the SEC and CFTC to improve standards governing who can participate in OTC derivative markets and (vii) working with international counterparts to ensure that the U.S. regulatory regime is matched by effective regimes internationally. The testimony follows on recent testimony by SEC Chairman Mary Schapiro on the same subject.

On July 1, the U.S. Securities and Exchange Commission (SEC) proposed rule revisions "intended to improve the disclosure provided to shareholders of public companies" with respect to executive compensation and corporate governance matters in proxy and information statements. The proposals would require information regarding: the relationship of a company's overall compensation policies to risk; the qualifications of executive officers, directors and nominees; company leadership structure; and potential conflicts of interest of compensation consultants. Amendments to proxy rules intended to clarify how they operate were also proposed. The proposals follow a speech by SEC Chairman Mary Schapiro on the subject on June 10. Comments on the amendments, yet to be published on the SEC website, are being accepted until 60 days after their publication in the Federal Register.

The SEC also approved a proposal of the New York Stock Exchange (NYSE) to eliminate discretionary voting by brokers in the election of directors. Currently, NYSE Rule 452 permits voting by brokers without instructions in certain situations. The changes will apply to shareholder meetings held on or after January 1, 2010.

Chairman Schapiro noted that while transactions involving OTC derivatives can replicate the economics of securities transactions without involving the purchase or sale of actual securities, such transactions currently fall outside the umbrella of federal securities laws. As such, Chairman Schapiro discussed a "functional and sensible approach to regulation", in which the SEC would have primary responsibility for securities-related OTC derivatives, while the responsibility for all other derivatives, including those related to such things as commodities, energy and foreign exchange would rest with the Commodity Futures Trading Commission. Citing the close relationship between the securities markets and securities-related OTC derivatives, Chairman Schapiro emphasized the importance of ensuring that such OTC derivatives be "subject to the federal securities laws so that the risk of arbitrage and manipulation of interconnected markets is minimized." Subjecting securities-related OTC derivatives to federal securities laws would also provide a unified and consistent framework for securities regulation.

For the testimony of the other witnesses that appeared before the Subcommittee, click here.

In a speech to New York financial writers yesterday, Securities and Exchange Commission Chairman Mary Schapiro discussed the SEC's concerns with private automated trading systems known as "dark pools". Such private systems do not display quotes in the public quote stream and according to Ms. Schapiro, the "lack of transparency has the potential to undermine public confidence in the equity markets, particularly if the volume of trading activity in dark pools increases substantially." As such, the SEC intends to take a "serious look" at potential regulatory actions to protect investors and market integrity.

As described yesterday, the U.S. Treasury Department's "Financial Regulatory Reform: A New Foundation" includes numerous proposals to address perceived inadequacies in U.S. financial regulation. Of particular note, the report proposes requiring that investment advisers to hedge funds and other private pools of capital (including private equity and venture capital funds) whose assets under management exceed "some modest threshold" be registered with the Securities and Exchange Commission under the Investment Advisers Act. Registration of such investment advisers would make them subject to recordkeeping and disclosure requirements, including requirements to report to investors, creditors and counterparties, as well as regulators. While the reporting may vary across the different types of private pools of capital, the report proposed confidential reporting to regulators of the amount of assets under management, borrowings, off-balance sheet exposures and other “necessary” information. As stated in the report, "[r]equiring the SEC registration of investment advisers to hedge funds and other private pools of capital would allow data to be collected that would permit an informed assessment of how such funds are changing over time and whether any such funds have become so large, leveraged, or interconnected that they require regulation for financial stability purposes."

These proposals follow similar proposals made by the G20 in the G20 Working Group 1 Final Report released in March of 2009, which also recommended registration of private pools of capital or their managers. The G20 Report also endorsed enhanced disclosure by such entities, including with respect to size, investment type, leverage, performance and participation in “certain systemically important markets.” As well, the G20 report recommended the development of common metrics to assess the significant exposures of counterparties for hedge funds, including prime brokers, given its view that failure of a systemically important fund or group of funds could be spread to the broader financial system through the use of counterparties.

Following the publication of the G20 Report, the European Commission also proposed its own framework for the regulation of managers of “alternative investment funds” on April 29, 2009. The proposed Directive would apply to any European Union domiciled “alternative investment fund manager” (AIFM) with assets under management above $EUR 100 million, or, for funds with no leverage and a lock-in period of five years or more, assets under management above $EUR 500 million. Under the proposed Directive, all AIFMs falling within the scope of the Directive would be required to be “authorized” by the regulator of their home state. Such authorization would impose a wide range of investment adviser type of requirements, including suitability, disclosure, governance, capital and other requirements. Disclosure requirements would relate to reporting on planned activity, identity and characteristics of the funds managed, governance and internal arrangements (including with respect to risk management, valuation and safe-keeping of assets, audits and systems of regulatory reporting). The manager would also be required to report to the relevant authority on the principal markets and instruments in which it trades, its principal exposures, performance data and concentration of risk. Additional disclosure requirements could also apply to managers managing leveraged funds and controlling stakes in companies.

On June 17, U.S. President Barack Obama announced a series of proposed financial regulatory reforms, found in the Treasury Department's "Financial Regulatory Reform: A New Foundation". The recommendations include proposals to create comprehensive regulation of all OTC derivatives, harmonize futures and securities regulation and strengthen oversight of systemically important payment, clearing and settlement systems. An executive summary of the proposals was also released, as were related fact sheets.

The U.S. Securities and Exchange Commission released a statement Wednesday by Chairman Mary Schapiro regarding executive compensation. While recognizing that the SEC's role is not to set pay scales or cap compensation, Ms. Schapiro stated that the SEC will actively consider "a package of new proxy disclosure rules that will provide further sunshine on compensation decisions." A number of disclosure requirements that will be considered by the SEC were listed in the statement, including information regarding a company's overall compensation approach, potential conflicts of interest by compensation consultants and the experience and qualifications of director nominees.

On a similar note, Treasury Secretary Timothy Geithner released a statement after meeting with Ms. Schapiro, stating that legislation will be pursued in two specific areas respecting compensation practices. The first, "say on pay" legislation, would provide the SEC with authority to require that companies allow non-binding shareholder votes on executive compensation. The second proposed piece of legislation would provide the SEC with "the power to ensure that compensation committees are more independent, adhereing to standards similar to those in place for audit committees as part of the Sarbanes-Oxley Act."

Citing the "dramatic decline in stock prices and market capitalizations of many listed companies", the U.S. Securities and Exchange Commission recently published temporary changes filed by the New York Stock Exchange (NYSE) in its listing thresholds for certain listed companies. These changes went into effect on May 12, 2009, the date of filing by the NYSE, and will remain in force until October 31, 2009. Prior to these temporary amendments, the rules considered companies that qualified to list under the Earnings Test, Assets and Equity Test or the "Initial Listing Standard for Companies Transferring from NYSE Arca" standard of the NYSE's Listed Company Manual to be below compliance standards if their average global market cap over a consecutive 30 trading-day period was less than $75 million and, at the same time, total stockholders' equity was less than $75 million. These temporary changes have lowered the thresholds for these companies to $50 million. Although the changes are in effect, the SEC is inviting comments until June 25, 2009 as it has 60 days from the date of filing to abrogate the rule change.

The U.S. Government Accountability Office recently released a report with respect to its review of SEC rules and actions respecting naked short selling and failures to deliver. The report recommends that the SEC expedite the finalization of the temporary rule implemented in 2008 and develop a process that allows the SEC to "raise and resolve implementation issues that arise from SEC regulations".

On May 20, the Securities and Exchange Commissionproposed rule amendments "that would provide shareholders with a meaningful ability to...nominate the directors of the companies that they own." Under the proposals, shareholders that meet certain thresholds (including holding between 1% and 5% of the voting securities, depending on the circumstances) would be eligible to have their nominee included in proxy materials. The proposed amendments would also allow for shareholder proposals in proxy materials regarding a company's nomination procedures under certain circumstances.

Public comment on the proposed amendments will be accepted for 60 days after their publication.

On April 8, 2009, the U.S. Securities and Exchange Commission voted to seek public comment on proposals to impose short sale price restrictions or circuit breaker restrictions and “whether such measures would help promote market stability and restore investor confidence.” The introduction of an uptick rule would be permanent and market-wide, while a "circuit breaker" would limit short selling for particular securities for the remainder of the day in the case of a severe decline in the security’s price. The SEC plans to publish the full text of the full proposals as soon as possible.

On March 2, 2009, the SEC provided notice of proposed changes to the NASD Rules as filed by the Financial Industry Regulatory Authority (FINRA). FINRA (a consolidation of the National Association of Securities Dealers and the member regulation, enforcement and arbitration functions of the New York Stock Exchange) is responsible for regulating securities firms doing business in the U.S. and prescribes the training and competence standards of securities representatives. The proposed changes to the NASD Rules would create a new limited representative registration category for investment banking professionals. In lieu of the current General Securities Registered Representative (Series 7) exam, those whose activities are limited to investment banking would take a more targeted qualification exam, while those already holding Series 7 registration would be "grandfathered" and not need to take the new exam.

The U.S. Securities and Exchange Commission (SEC) recently published a final rule requiring companies to incorporate interactive data, using eXtensible Business Reporting Language (XBRL), into financial statements. Issuers will have to "tag" data using a standard taxonomy and provide the interactive data as an exhibit to periodic and current reports and registration statements as well as transition reports for a change in fiscal year. Further, financial statements in interactive data format will have to be posted on a filer's corporate website. The requirements are intended to improve the usefulness of financial information to investors. "Through interactive data, what is currently static, text-based information can be dynamically searched and analyzed, facilitating the comparison of financial and business performance across companies, reporting periods, and industries."

The following table identifies the report for which an issuer would first be required to file interactive data:

Domestic and foreign large accelerated filers using U.S. GAAP and having a worldwide public common equity float above $5 billion as of the end of the second fiscal quarter of their most recently completed fiscal year

Quarterly report on Form 10-Q or annual report on Form 20-F or Form 40-F containing financial statements for a fiscal period ending on or after June 15, 2009

All other large accelerated filers using U.S. GAAP

Quarterly report on Form 10-Q or annual report on Form 20-F or Form 40-F containing financial statements for a fiscal period ending on or after June 15, 2010

All remaining filers using U.S. GAAP

Quarterly report on Form 10-Q or annual report on Form 20-F or Form 40-F containing financial statements for a fiscal period ending on or after June 15, 2011

Foreign private issuers with financial statements prepared in accordance with IFRS as issued by the IASB

Annual reports on Form 20-F or Form 40-F for fiscal periods ending on or after June 15, 2011

As one of its last acts of 2008, the U.S. Securities and Exchange Commission (the SEC) issued its final rule adopting revisions to the oil and gas reporting disclosure requirements applicable to all U.S. domestic and most foreign issuers (the Final Rule)1. The rule revisions will become effective on January1, 2010, and issuers will be required to begin complying with them in registration statements filed on or after that date, and in annual reports on Form 10-K and Form 20-F for fiscal years ending on or after December 31, 2009. Citing the potential for incomparable disclosures, the SEC will not permit issuers to follow the new rules prior to their effective date.

The new disclosure requirements will not apply to Canadian foreign private issuers that file their annual reports on Form 40-F under the Multi-Jurisdictional Disclosure System (MJDS) and comply with Canadian disclosure requirements under National Instrument 51-101 Standards for Oil and Gas Activities (NI 51-101),2but will apply to Canadian foreign private issuers who have obtained exemptions in Canada permitting them to estimate reserves and disclose related oil and gas activities in accordance with SEC requirements.

The Final Rule should ultimately result in greater similarity between, and in turn comparability of, the public disclosure of U.S. and Canadian oil and gas issuers. The following summarizes the top five things Canadian issuers need to know about the new rules.

1.Move toward PRMS classifications and COGEH definitions

As the Final Rule represents the first significant revisions in U.S. oil and gas disclosure requirements in over 25 years, it is no surprise that the definitions in the old rules required updating to reflect changes in the oil and gas industry and markets and the development of new technologies. Many of the new and revised definitions in the Final Rule were drafted to be consistent with the Petroleum Resources Management System (PRMS) which is the classification system for petroleum reserves and resources approved by the Society of Petroleum Engineers. Definitions for the terms “deterministic estimate”, “probabilistic estimate” and “resources” in the Final Rule were based on the Canadian Oil and Gas Evaluation Handbook (COGEH).

The adoption of PRMS and COGEH terminology in the Final Rule will make U.S. disclosure more consistent with NI 51-101 as the definitions in NI 51-101 are also based on PRMS and COGEH terminology.

2.12-Month Average Pricing

The Final Rule requires issuers to report oil and gas reserves using a 12-month average price, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. This is different than the NI 51-101 approach which requires issuers to value their reserves on future prices and costs that are based on either contractual prices and costs, if applicable, or a reasonable outlook of the future.

The SEC’s intent behind the new pricing requirement in the Final Rule is to increase comparability between different issuers’ reserves disclosures while mitigating the variability that the current single-day, fiscal year-end spot price may have on reserves estimates.

Most Canadian commenters3supported the use of a 12-month average price to serve as a proxy for economic conditions that determine the economic producibility of reserves. Certain commenters, including several Canadian issuers, noted that the use of an average price would reduce the effects of short term volatility and seasonality, while maintaining comparability of disclosures among issuers. Six commenters, five being Canadian issuers, recommended the use of a 12-month daily average price because they thought that a daily average price would be more appropriate than a monthly average price and noted that oil sales contracts are often based on daily averages; however, the SEC chose not to accept that recommendation.

3.Extraction of bitumen and other unconventional resources

The Final Rule revises the definition of “oil and gas producing activities” to include extraction of saleable hydrocarbons from certain “unconventional” and “non-traditional” sources such as bitumen extracted from oil sands and oil and gas extracted from coal and shales. The intent of this amendment is to shift the focus of the definition to the final product of such activities, regardless of the extraction technology used. All commenters on this issue supported the inclusion of extraction of unconventional resources as, “oil and gas producing activities”, as is already the case under NI 51-101.

In similar fashion to the NI 51-101 disclosure requirements, the Final Rule requires the separation of reserves based on final product, distinguishing between final products that are traditional oil or gas and final products of synthetic oil or gas. The SEC believes this separation will allow investors to identify resources in projects producing synthetic oil or gas that may be more sensitive to economic conditions than other resources. One Canadian commenter was concerned that distinguishing bitumen or other intermediate synthetic product from traditional oil and gas creates a false and misleading sense of comparability when, in reality, producers that upgrade bitumen and sell synthetic crude do not face the same risks and rewards as do producers that sell the bitumen itself. Though the SEC considered this comment, it believes that the distinction between an issuer’s traditional and unconventional activities is an important one from an investor’s perspective because many of the unconventional activities are costlier and, therefore, have a much higher threshold of economic producibility.

4.Optional disclosure of unproved reserves

In Canada, under NI 51-101, disclosure of probable reserves is mandatory and disclosure of possible reserves is voluntary; however, in the U.S. under the Final Rule, disclosure of both probable and possible reserves will be voluntary. The Final Rule adopts definitions of the terms “probable reserves” and “possible reserves” that are consistent with the PRMS. If an issuer chooses to disclose such reserves under the Final Rule, it must provide the same level of geographic detail as required for proved reserves and must state whether the reserves are developed or undeveloped. Issuers making such disclosure must also disclose the relative uncertainty associated with these classifications of reserves estimations.

The SEC’s intent behind this change is to enable issuers to provide investors with more insight into the potential reserves base that management of such issuers may use as the basis for their decisions to invest in resource development.

Most commenters, including two Canadian issuers that commented on this issue, supported permitting the disclosure of probable and possible reserves in filed documents. However, several commenters, including one Canadian commenter, cautioned that there could be significant variability among disclosures. Some commenters pointed to the broad range of technologies and methods used by issuers to support these estimates as a factor that would lead to inconsistent disclosure and also noted that, in some cases, such disclosure could confuse investors and expose issuers to increased litigation because of the inherent uncertainty associated with probable and possible reserves. After noting that numerous oil and gas issuers already disclose unproved reserves on their web sites and in press releases, and that such disclosure does not appear to have created confusion in the marketplace, the SEC decided to make these disclosures voluntary, and to allow each issuer to exercise its own discretion in that regard in its SEC filings.

5.Preparation of reserves estimates and third party reports

The Final Rule does not require that an independent third party prepare, or conduct a reserves audit of, the issuer’s reserves estimates. It does, however, require issuers to provide a general discussion of the internal controls that are used to assure objectivity in the reserves estimation process as well as to disclose the qualifications of the technical person primarily responsible for preparing the reserves estimates or conducting the reserves audit (if an issuer discloses that such a reserves audit has been performed) regardless of whether the technical person is an employee or an outside third party. This is unlike NI 51-101, which, absent an exemption, mandates that a third party report be prepared and disclosed.

If an issuer represents that a third party prepared the reserves estimates or conducted a reserves audit of the reserves estimates, the issuer must file a report of the third party as an exhibit to the relevant registration statement or report. These third party reports need not be the full “reserves report.” Rather, they could be shorter reports that summarize the scope of work performed by, and conclusions of, the third party.

Conclusion

The Final Rule represents a welcome update of the U.S. oil and gas reporting disclosure requirements and brings such requirements closer to applicable Canadian rules. While there are some continuing differences, comparisons between the public disclosure of U.S. and Canadian oil and gas issuers should soon be easier.

1 See: Release No. 33-8995 (December 31, 2008), 74 Fed. Reg. 2157. The SEC first adopted the current oil and gas disclosure requirements specified in Rule 4-10 of Regulation S-X and Item 102 of Regulation S-K in 1978 and 1982, respectively. It first issued a concept release regarding these amendments on December 12, 2007, and issued a proposing release (Release No. 33-8935) on June 26, 2008.

2A Canadian issuer qualifies as a foreign private issuer so long either: (1) no more than 50% of the issuer’s outstanding voting securities are held by U.S. residents; or (2) none of the following is true: (i) a majority of the executive officers or directors are U.S. citizens or residents; (ii) 50% or more of the assets of the issuer are located in the United States; or (iii) the business of the issuer is administered principally in the United States. Issuers must test their eligibility as foreign private issuers as at the end of their second fiscal quarter. A Canadian foreign private issuer will be eligible to use MJDS so long as: (1) it has been subject to the periodic reporting requirements in Canada for a period of at least 12-calendar months immediately preceding the filing of the relevant MJDS Form and is currently in compliance with such obligations; and (2) the aggregate market value of the public float of the issuer’s outstanding equity securities is US$75 million or more. Canadian foreign private issuers wishing to use Form 40-F to file their annual report must test their eligibility to use Form 40-F as of the end of the fiscal year to which the report relates.

3The commentary referenced herein is the commentary that was submitted to the SEC during the public consultation period preceding the release of the Final Rule.

The SEC announced yesterday that it was extending the Emergency Order of September 18 prohibiting the short selling of financial institutions. The Order was set to end at the end of the day on October 2nd, but considering the current state of the market, the SEC decided to extend the Order until the earlier of either the President's signing of the market "bailout" bill or 11:59 p.m. on October 17th, 2008.

The SEC has also extended its Emergency Order of September 17, 2008, which banned "naked" short selling. The Order was set to expire at the end of day October 1, but has now been extended to 11:59 p.m. on October 17, 2008. In the press release accompanying the extension Order, the SEC also communicated that the temporary reporting requirements regarding new short sales and the penalties for violations will extend beyond the above date in the form of an interim final rule.

On October 1, the SEC announced that it is extending its Emergency Order of September 18 temporarily broadening the safe harbour from liability for issuers repurchasing securities. The extended Order will now terminate at 11:59 p.m. on October 17, 2008.

On September 23, 2008, the SEC issued amendments to its rules relating to foreign private issuers, which are intended to enhance information available to investors. Of note, the amendments will allow reporting foreign issuers to assess their eligibility to use the rules and special forms available to foreign private issuers once a year rather than continuously. The reporting deadline for annual reports by foreign private issuers, however, will be accelerated and disclosure requirements will be changed.

The U.S. SEC has recently issuednew rules, effective September 18, which require short sellers and broker-dealers to deliver securities by the close of business on the settlement date. A broker-dealer in violation of the close-out requirement will be forced to locate and pre-borrow securities for future short sales in the same security. The SEC took action due to its concern "about the possible unnecessary or artificial price movements based on unfounded rumors regarding the stability of financial institutions and other issuers exacerbated by 'naked' short selling."

On Wednesday, the SEC also voted to publish a proposed roadmap that could lead to the adoption of International Financial Reporting Standards (IFRS) beginning in 2014. The roadmap provides several milestones that lead to a 2011 decision on whether adoption of IFRS occurs.

On Wednesday, the U.S. SECvoted to modernize and update disclosure requirements for foreign companies offering securities in U.S. markets. The amendments seek to improve access to such information by providing American investors with instant electronic access to foreign company disclosure on the internet and in English. The full text of the rules will be published by the SEC shortly.

The SEC announced a successor to its EDGAR database today, which it states will provide faster and easier access to financial information. The new Interactive Data Electronic Applications (IDEA) will first supplement, but eventually replace EDGAR. IDEA will collate information from individual forms and allow investors to create reports and analysis, as opposed to the current system, which only allows investors to review one form at a time.

The US SEC recently approved a rule change to amend NASDAQ's definition of "independent director". Previous to the change, NASDAQ Rule 4200(a)(15)(B) generally provided that a director who accepted or had a family member who accepted any compensation from the company in excess of $100,000 during a period of 12 months within the previous three years may not have been deemed an independent director. The approved change to the Rule raises this threshold to $120,000.

On August 7, 2008, the U.S. SEC announced two new anti-money laundering compliance initiatives. The first, an online reference site, was originally developed for the benefit of SEC examiners and provides links to relevant laws, rules and guidance to assist mutual funds in AML compliance efforts. The second initiative, a centralized SEC SAR Alert Message Line, will allow the reporting of Suspicious Activity Reports that may require immediate attention by the SEC.

On July 30, 2008, the U.S. Securities and Exchange Commission (SEC) announced new guidance for public companies with respect to investor disclosure on corporate websites. Citing the development of the internet and the emergence of social networking since the last time it issued such direction, the SEC guidance clarifies how companies can develop their websites while complying with securities regulations.